The MVRV indicator is designed to analyze long-term trends and cycles. It is used as a tool to detect two main market phases — accumulation and distribution.

MVRV is based on the idea of two types of market participants — speculators and hodlers. In the context of the indicator, hodlers are investors, who have abandoned short-term financial gain in favor of the long-term perspective; speculators are traders aimed at short-term gains. The indicator helps to determine which players prevail in the market at a particular moment in time.

Who created MVRV and when?

MVRV is a joint development of crypto-enthusiasts Murad Mahmudov and David Puell.

The indicator is their personal view on the analysis of bitcoin market cycles, described in an October 2018 blog post on Medium.

The authors of MVRV were inspired by the concept of realized capitalization presented by Nick Carter from Castle Island Ventures and Antoine Le Calvez from Blockchain.info at the Riga Baltic Honeybadger conference in September 2018.

Subsequently, modifications of MVRV appeared. Using additional data and clarifying metrics, MVRV Z-Score and MVRV (Free Float) were developed — they became the most popular in the cryptocurrency community.

How to calculate the MVRV indicator?

The MVRV indicator is a ratio obtained by dividing market capitalization by realized capitalization. The indicator is based on daily updated data.

Market capitalization is a way to determine the total value of all existing coins (bitcoins) at a particular point in time. Corresponds to the product of the total supply of an asset by its market price.

Realized capitalization is a more computationally complex version of market capitalization, which takes into account the price of each coin at the time of the last transaction on the network. If the last move of a single 10 BTC occurred at a price of $20,000, then the realized capitalization for those coins is $200,000. In this way, the capitalization for all coins is calculated based on the price at the time of their last movement.

In the case of modified versions of MVRV, the variables may change. For example, to determine the MVRV Free Float, the market capitalization indicator was replaced with the market capitalization in free float. The latter does not take into account coins that have been lost or unmoving for more than five years.

How and why do we use the MVRV indicator?

The MRVR indicator and its derivatives are used to determine long-term trends, identify cycles of accumulation and distribution. A drop in the coefficient value below 1 suggests that active speculators prevail over long-term investors.

In the understanding of Mahmudov and Puell, a multi-month finding of the coefficient below the value of 1 indicates an accumulation cycle. For the MVRV Free Float and MVRV Z-Score versions, the accumulation cycle begins when the ratio falls below 1 and 0, respectively.

In the original version of the MVRV indicator, a value indicating a distribution cycle is indicated above 3.7. The MVRV Free Float and MVRV Z-Score modifications indicate distribution cycle levels above 3.2 and 7, respectively.

MVRV Z-Score indicator. Source: Glassnode

The MVRV concept assumes that lowering the ratio and increasing the number of unmoving coins is underpinned by investors’ long-term belief in bitcoin technology and price growth. Increasing the indicator to speculative levels (3.2–7) and decreasing the number of unmoving coins are seen as a way to strengthen the asset’s recognition and expand its user base.

MVRV is one of the most popular indicators on the crypto market. It is used not only by individual researchers, but also by professional analytical companies like Glassnode, Coin Metrics and CryptoQuant.

The risks of using MVRV

Despite its popularity, MVRV is an experimental tool for analyzing the cryptocurrency market. Like any other indicator, the coefficient carries risks for users. Let’s consider some of them.

The indicator components

Capitalization and realized capitalization, as the main variables in calculating MVRV, may lose relevance along with the development of Lightning Network and Liquid Network technologies.

These solutions enable transactions outside of bitcoin’s core network. If they are widely adopted, the logic of indicator calculations may fundamentally change and lead to incorrect conclusions.

Trading risks

Reaching MVRV of any levels is not a signal to buy or sell. MVRV is not a trading indicator and is not intended to evaluate traders’ behavior.

Interpretation

MVRV would mean that any bitcoin movement online is a purchase of the asset and its withdrawal to one’s own wallet. However, it is impossible to know what is really behind the on-chain transactions.

Transferring a notional 100,000 BTC purchased at $100 to another address at a time when quotes have risen to $50,000 is not a purchase or a sale. The user could simply change the way the asset is stored by sending the coins to a different address. But MVRV interprets this behavior as a change in ownership and assumes that the bitcoin was purchased at $50,000, not $100.